Electricity Transmission and Distribution Tariff Design

Transmission and distribution networks play a vital role in facilitating competition and trade in electricity and providing the infrastructure needed to move electricity from where it is produced to where it is consumed. Their importance will increase in the coming years, as renewable generation in more remote locations requires an expanded transmission grid, including subsea networks to connect offshore generation in some jurisdictions. Transmission and distribution systems will also face significant investment requirements linked to decarbonization policies and the emergence of new technologies like electric vehicles. Against this background, the design of regulated tariffs (or “rates”) that customers and generators pay to use transmission and distribution grids is important for recovering network companies’ costs and signaling network costs to users. If well designed, transmission and distribution tariffs can save customers money by encouraging consumption and generation at times and in locations where the costs of transporting it to end users is lowest.

Tariff design also determines the distribution of costs among customers. Because electricity networks are natural monopolies, much of their costs are invariant to changes in network use, so policymakers face choices on how to mark up tariffs that reflect “marginal” costs to recover network companies’ total regulated costs of service. These judgments will become more challenging as new technologies allow more customers to change their patterns of production and consumption in response to network tariffs.